Amenities provided to Doctors by Pharma Companies are Business Expenditure: ITAT Mumbai [Read Order]


In a recent decision, the Mumbai bench of the ITAT ruled that the various amenities provided to doctors by the pharmaceutical companies are allowable as business expenditure under section 37(1) of the Income Tax Act.

While allowing the deduction, the bench clarified that these amenities, such as conducting tours, visits, seminars and conferences to doctors and their family, and freebies given to doctors in the form of free samples and gifts are with an aim to promote their business, which is allowable as deduction from their business income.

The assessee, PHL Pharma Agency Pvt ltd, is a pharmaceutical company engaged in the business of providing Pharma marketing consultancy and detailing services to develop mass market for Pharma products. For the relevant assessment year, the assessee claimed expenditure under various heads such as, advertisement expenses, sales promotion expenses, ‘Customer Relationship &Management expenses’, ‘Key Account Management expenses’, gift articles and cost of samples. The AO held that all these expenses are in the nature of freebies given to medical practitioners/doctors which are disallowable in terms of Explanation to section 37(1) as clarified by CBDT vide its Circular No.5/2012 dated 1.8.2012.

Assessee claimed that this includes expenses for small value items given across the entire pool of doctors in India so as to maintain brand memory on a continuous basis.According to them, the gifts such as diaries, pen sets, injection boxes, calendars, table weights, postcard holders, stationery items, contains logo of the assessee company and the name of the medicine is advertised.They submitted that this is with an aim to promote their brand since there are umpteen number of brands for the same generic drug. It was further stated that free samples are distributed through various agents to doctors with a label that“physician sample not for sale”, to prove the efficacy of the drug and to establish the trust of the doctors on quality of drugs.

The AO, rejecting all these contentions, confirmed that these expenditure are not allowable under the Act since the notification dated 10.12.2009 clearly prohibits the Medical practitioners from receiving any kind of cash or monetary grants from any pharmaceutical or health care industries.

The bench, relied upon the decision of the Delhi High Court in Max Hospital vs. MCI, wherein the Medical Council of India admitted that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry.In view of the above decision, the bench held that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation.

“So once the Indian Medical Council Regulation does not have any jurisdiction nor has any authority under law upon the pharmaceutical company or any allied health sector industry, then such a regulation cannot have any prohibitory effect on the pharmaceutical company like the assessee. If Medical Council regulation does not have any jurisdiction upon pharmaceutical companies and it is inapplicable upon Pharma companies like assessee then, where is the violation of any of law/regulation? Under which provision there is any offence or violation in incurring of such kind of expenditure.”

Analyzing the provisions of section 37(1) of the Income Tax Act, the bench noted that the section applies to an assessee who is claiming deduction of expenditure while computing his business income.

“The Explanation provides an embargo upon allowing any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. This means that there should be an offence by an assessee who is claiming the expenditure or there is any kind of prohibition by law which is applicable to the assessee. Here in this case, no such offence of law has been brought on record, which prohibits the pharmaceutical company not to incur any development or sales promotion expenses. A law which is applicable to different class of persons or particular category of assessee, same cannot be made applicable to all. The regulation of 2002 issued by the Medical Council of India (supra), provides limitation/curb/prohibition for medical practitioners only and not for pharmaceutical companies. Here the maxim of “Expressio Unius Est Exclusio Alterius” is clearly applicable, that is, if a particular expression in the statute is expressly stated for particular class of assessee then by implication what has not been stated or expressed in the statute has to be excluded for other class of assessee. If the Medical Council regulation is applicable to medical practitioners then it cannot be made applicable to Pharma or allied health care companies. If section 37(1) is applicable to an assessee claiming the expense then by implication, any impairment caused by Explanation 1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a different class of person/assessee will not impinge upon the assessee claiming the expenditure under this section.”

It was further observed that the CBDT circular dated 1.8.2012 is applicable for medical practitioners only and the censure/action which has been suggested by it is only on medical practitioners and not for pharmaceutical companies or allied health sector industries.

Allowing the appeal, the bench noted that conducting tours, seminars, conferences are for updating the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies. Further, there is no violation by the assessee in giving any kind of freebies to the medical practitioners. On the other hand, such kind of expenditures by a pharmaceutical companies are “purely for business purpose which has to be allowed as business expenditure and is not impaired by EXPLANATION 1 to section 37(1).”

In September, the co-ordinate bench of the ITAT Mumbai In the case of Liva Healthcare, had disallowed such expenses under section 37(1) of the Act on the ground that they were not incurred wholly and exclusively for the purpose of business as the same were incurred to create good relations with the doctors in lieu of expected favours from doctors for recommending to the patients the pharmaceutical products dealt with by the company to generate more and more business and profits for the assessee company.

While reversing its stand, the bench noted that the decision in Liva Healthcare Limited does not apply to the resent case since were substantially different from the facts of the present case.

Read the full text of the order below.